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Government spending

"Public Purse" and "Public money" redirect here. For the term used in relation to the British monarchy, see Privy Purse. For the academic journal formerly called Public Money, see Public Money & Management.

Contents

For most governments around the world, the majority of government spending takes place at the federal/national level. As of the 21st century, in the United States, approximately two thirds of government spending is spent by the federal government, while the remaining 1/3 of government spending is spent by state and local governments.[3] Federal government spending in the United States can be broken down into 3 general categories: mandatory/entitlement spending, discretionary spending, and interest on government debt.[4]

Figure A - Fiscal Year 2019 Mandatory Government Spending Breakdown as a percentage of total expected expenditures. Data from U.S. Office of Management and Budget archives.

Mandatory/Entitlement Spending is spending for programs with funding levels that are automatically determined by the number of eligible recipients in those programs.[3] Mandatory programs are created under authorization laws, meaning that congress must provide whatever funds are necessary to keep these programs functional. Funding for these programs cannot be adjusted in the annual budget process; on the contrary, the only way congress can change funding levels for these programs is by amending the authorization laws directly. Each year, the Office of Management and Budget provides an estimate of required funds for these programs, which is included in the annual budget.[4][5]

Figure A provides a breakdown of the major mandatory government spending categories as of the fiscal year 2019 budget approved by congress. As Figure A suggests,Social Security is the single largest mandatory spending item, taking up 38% or nearly $1,050 billion of the $2,736 billion total. The next largest expenditures are Medicare and Income Security, with the remaining amount going to Medicaid, Veterans Benefits, and Other programs.[6][7]

Figure B provides a snapshot of the major discretionary government spending categories as of the fiscal year 2019 budget approved by congress. As the figure suggests, over 50% of discretionary spending is attributed to national defense. The remaining 48% of funds is divided among non-defense items such as transportation and education. Total Discretionary Spending approved for the fiscal year 2019 is $1,305 billion, just 28% of total spending.[5]

Often times, federal governments spend more money than they collect in tax revenue in a given year. When the government spends more than it brings in, it runs a Budget Deficit that year.[9] In order to pay for the extra spending, governments issue debt. Government Debt is the amount of money borrowed from individuals, firms, or foreign entities.[3] Debt accrues over time. Most public debt is held in the form of treasury bills and bonds, and the government has to pay down debt over time. In order to provide an incentive for individuals, businesses and other entities to lend money, the government must also pay these parties interest on the debt.[10] The interest expense for fiscal year 2019 is $363 billion, or 7.9% of the total budget. According to estimates from the Office of Management and Budget, interest on government debt is expected to more than double by 2028 and account for a larger percentage of total expenditures.[5]

At the beginning of the 20th century, the majority of government spending in the United States took place at the local level. However, federal spending increased relative to state and local spending as a result of World War I and World War II, and by the 1930s, state and local government spending accounted for less than one half of government spending. By 2010, federal spending was more than 20% of GDP, while state and local spending ranged from 8%-10% of GDP.[10][11] As a result, in recent years, state and local governments account for approximately 1/3 of total government expenditures.[3] State and local government spending is typically spent in 6 broad categories: elementary and secondary education, higher education, health, welfare, police and safety, and transportation.[3][12] Over the last few decades, funding for education at the state level has fallen, while funding for health has more than doubled.[13]

While federal governments often run budget deficits (where government spending > government tax revenue), state governments usually have balanced budgets.[3] A balanced budget is when government spending in a given year equals government revenue in that year.[14][15] This high degree of fiscal responsibly is a result of most states in the U.S. having balanced budget requirements.[16] A balanced budget requirement is a law that requires a government to balance its budget annually, such that government spending equals government revenue.[17] There are two types of balanced budget requirements: ex-post balanced budget requirements, and ex-ante balanced budget requirements. An ex-post balanced budget requirement stipulates that a government must balance their budget by the end of each fiscal year, while an ex-ante balanced budget requirement dictates that a state must adopt a balanced budget at the beginning of each fiscal year. Ex-ante balanced budget requirements rely on estimates and assumptions about future costs and revenue growth, so they are more easily manipulated.[3][17]

With a population of nearly 40 million as of 2018, California has by far the largest annual state expenditures.[18][19] California receives a significant amount of money from the federal government, especially for healthcare and welfare programs, but also has large in-state expenditures.[20] According to California's Department of Finance, the state's 2017-2018 enacted state budget includes over $180 billion in state funds.[18] As can be seen below, Table 1 gives an overview of California's 2017-2018 enacted state budget. As the table suggests, Heath Care and K12 Education represent California's largest expenditures of state funds. The largest heath care expenditure is for California's Medi-Cal program, a health insurance program for low-income families in California.[21][22] In addition, health care spending is focused on women's health services, treatment for addiction, and dentistry.[21] As Table 1 suggests, California also spends significantly on higher education, police, and transportation, with smaller portions of funding attributable to environmental protection and other activities.[18]

Figure C - The Market for Capital (the Loanable Funds Market) and the Crowding Out Effect. An increase in government deficit spending "crowds out" private investment by increasing interest rates and lowering the quantity of capital available to the private sector.

Government spending can be a useful economic policy tool for governments. Fiscal policy can be defined as the use of government spending and/or taxation as a mechanism to influence an economy.[9][14] There are two types of fiscal policy: expansionary fiscal policy, and contractionary fiscal policy. Expansionary fiscal policy is an increase in government spending or a decrease in taxation, while contractionary fiscal policy is a decrease in government spending or an increase in taxes. Expansionary fiscal policy can be used by governments to stimulate the economy during a recession. For example, an increase in government spending directly increases demand for goods and services, which can help increase output and employment. On the other hand, contractionary fiscal policy can be used by governments to cool down the economy during an economic boom. A decrease in government spending can help keep inflation in check.[9] During economic downturns, in the short run, government spending can be changed either via automatic stabilization or discretionary stabilization. Automatic stabilization is when existing policies automatically change government spending or taxes in response to economic changes, without the additional passage of laws.[3][9] A primary example of an automatic stabilizer is unemployment insurance, which provides financial assistance to unemployed workers. Discretionary stabilization is when a government takes actions to change government spending or taxes in direct response to changes in the economy. For instance, a government may decide to increase government spending as a result of a recession.[3] With discretionary stabilization, the government must pass a new law to make changes in government spending.[9]

In economics, the potential "shifting" in resources from the private sector to the public sector as a result of an increase in government deficit spending is called Crowding Out.[9]Figure C depicts the Market for Capital, otherwise known as the Market for Loanable Funds. The downward sloping demand curve D1 represents demand for private capital by firms and investors, and the upward sloping supply curve S1 represents savings by private individuals. The initial equilibrium in this market is represented by point A, where the equilibrium quantity of capital is K1 and the equilibrium interest rate is R1. If the government increases deficit spending, it will borrow money from the private capital market and reduce the supply of savings to S2. The new equilibrium is at point B, where the interest rate has increased to R2 and the quantity of capital available to the private sector has decreased to K1. The government has essentially made borrowing more expensive and has taken away savings from the market, which "crowds out" some private investment. The crowding out of private investment could limit the economic growth from the initial increase government spending.[3][14]

Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is called government final consumption expenditure (GFCE.) It is a purchase from the national accounts "use of income account" for goods and services directly satisfying of individual needs (individual consumption) or collective needs of members of the community (collective consumption). GFCE consists of the value of the goods and services produced by the government itself other than own-account capital formation and sales and of purchases by the government of goods and services produced by market producers that are supplied to households – without any transformation – as "social transfers" in kind.[24]

Figure D - Historical Defense Spending, 1970-2019. Data from the United States Office of Management and Budget archives.

National defense spending is any government spending attributable to the maintenance and strengthening of the United States armed forces, including the Army, Navy, Marines, and the Air Force.[25] As of the fiscal year 2019 budget approved by congress, national defense is the second largest expenditure in the federal budget.[8]Figure D provides a historical picture of military spending over the last few decades. In 1970, the United States government spent just over $80 billion on national defense. Over the next two decades, national defense spending increased steadily to around $300 billion per year.[5] Military spending fell in the 1990s, but increased markedly in the 2000s as a result of the War in Afghanistan and Iraq. Military spending was cut slightly during the Obama Administration, but the Trump Administration plans to ramp up military spending to combat ISIS. National defense spending is expected to be $678 billion in 2019, an amount greater than the military expenditures of the next 9 countries combined.[26]

The United States spends vastly more than other countries on national defense. Table 2 below shows the top 10 countries with largest military expenditures as of 2015, the most recent year with publicly available data.[28] As the table suggests, the United States spent nearly 3 times as much on the military than China, the country with the next largest military spending. The U.S. military budget dwarfed spending by all other countries in the top 10, with 8 out of countries spending less than $100 billion in 2015.

Government acquisition intended to create future benefits, such as infrastructure investment or research spending, is called gross fixed capital formation, or government investment, which usually is the largest part of the government.[29] Acquisition of goods and services is made through production by the government (using the government's labour force, fixed assets and purchased goods and services for intermediate consumption) or through purchases of goods and services from market producers. In economic theory or in macroeconomics, investment is the amount purchased per unit of time of goods which are not consumed but are to be used for future production (i.e. capital). Examples include railroad or factory construction.

Spending on physical infrastructure in the U.S. returns an average of about $1.92 for each $1.00 spent on nonresidential construction because it is almost always less expensive to maintain than repair or replace once it has become unusable.[30]

Likewise, government spending on social infrastructure, such as preventative health care, can save several hundreds of billions of dollars per year in the U.S., because for example cancer patients are more likely to be diagnosed at Stage I where curative treatment is typically a few outpatient visits, instead of at Stage III or later in an emergency room where treatment can involve years of hospitalization and is often terminal.[31]

Government expenditures that are not acquisition of goods and services, and which represent transfers of money such as social security payments, are called transfer payments. These payments are considered to be exhaustive[jargon] because they do not directly absorb resources or create output. In other words, transfers are made without an exchange of goods or services.[32] Examples of certain transfer payments include welfare (financial aid), social security, and government giving subsidies to certain businesses (firms).

In 2010 national governments spent an average of $2,376 per person, while the average for the world's 20 largest economies (in terms of GDP) was $16,110 per person. Norway and Sweden expended the most at $40,908 and $26,760 per capita respectively. The federal government of the United States spent $11,041 per person. Other large economy country spending figures include South Korea ($4,557), Brazil ($2,813), Russia ($2,458), China ($1,010), and India ($226).[33] The figures below of 42% of GDP spending and a GDP per capita of $54,629 for the U.S. indicate a total per person spending including national, state, and local governments was $22,726 in the U.S.

Public social spending comprises cash benefits, direct in-kind provision of goods and services, and tax breaks with social purposes provided by general government (that is central, state, and local governments, including social security funds).[37]

^Bishop, Matthew (2012). "Economics AZ– terms beginning with T;transfer". The Economist. Retrieved 11 July 2012. Payments that are made without any good or service being received in return. Much PUBLIC SPENDING goes on transfers, such as pensions and WELFARE benefits. Private-sector transfers include charitable donations and prizes to lottery winners.

^CIA World Factbook, population data from 2010, Spending and GDP data from 2011. Note: these numbers do not include U.S. state and local government spending which when included bring the per capita spending to $16,755